Rallying Microsoft shares could be forming the troubling ‘bear flag’ chart pattern

I often refer back to the work of financial pioneer and “Father of Technical Analysis” Charles Dow, whose work in the early 20th century shaped how generations of investors have tried to make sense of market movements. The foundation of Dow’s work was based on the analysis of price trends, comparing swing highs and swing lows to define and track the trends over time. An initial look at the chart of Microsoft (MSFT) may suggest a consistent uptrend of higher highs and higher lows. And while this short-term uptrend is a valid observation, this also means Microsoft may be forming the dreaded “bear flag” pattern, which often precedes a major downdraft. A bear flag pattern occurs when you have an initial downtrend, in this case, the drop from $470 to $385 from early July to early August of this year. We can then see a short-term uptrend channel formed by the highs and lows in August and September. September has been a decent month for MSFT, having gained about 5% from the end of August. In fact, the August and September swing lows are right around the 200-day moving average, adding further conviction to a short-term bullish thesis. Downside target While the short-term trend is positive, the risk now is that Microsoft would swing back lower to confirm a bear flag pattern, indicating a broader breakdown in this Magnificent 7 name. If MSFT would drop below $410 in the coming weeks, that would complete the bear flag pattern, and would also push the price back below the 200-day moving average. This would also suggest a minimum downside objective of around $370, which would represent a 61.8% retracement of the October 2023 to July 2024 rally phase. From a seasonal perspective, given the weakness usually experienced in September, this could set MSFT up for a classic Q4 rally into year-end strength. While charts like Microsoft are still in a position of strength, they are beginning to show signs of weakness that have been common in previous bearish rotations. One of the great benefits of technical analysis is to lay out an “if-then” statement as we’ve outlined today, helping investors manage risk while they identify potential opportunities. -David Keller, CMT marketmisbehavior.com DISCLOSURES: (None) All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, NBC UNIVERSAL, their parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.